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jettaker: "I contributed the full $5,500 to my Roth IRA this year only to just realize that I am completely ineligible for it and therefore I now have an excess contribution of $5,500. The perils of being a newlywed... Anyway, now I am trying to figure out how to remedy it. Two options:

1) Withdraw it all. Pay 10% distribution penalty (but what is the 10% assessed on?). and pay 33% taxes on the net income attributable. In rough numbers my NIA is 5500 x ((60000-40000)/40000) = 2750. So "loss" = $900 + penalty. Note I live in FL but spent the first 8 months of 2013 in NY, so maybe state tax comes into play too?

2) Keep it there and don't contribute anything more this year (I have already contributed $750) I would pay 6% excise tax but only on the excess contribution. So $330 for 2013 excess and $45 for 2014 excess. Note that this is an option because my husband made a career switch and took a significant pay cut so I anticipate full eligibility again in 2014.

By my logic option #2 is the obvious way to go. But I want to make sure that all my assumptions are correct. Mainly I want to make sure the 6% excise tax does not apply to NIA. Please help! Thank you in advance!"

The real Tax pros will likely be along, but I believe that there is a third option, to recharacterize the 2013 contributon as a traditional IRA contribution (though it will likely not be deductible).

No change in income tax due for 2013 because you were not deducting the Roth contribution anyway, no excise tax, no early withdrawal.

"Alternatively, an individual may recharacterize a Roth IRA contribution to a Traditional IRA contribution in order to claim a tax deduction for the amount, or because he or she is ineligible for the Roth IRA contribution."

Only potential downside, you create basis in a traditional IRA, and if you currently have no traditional IRAs with basis, potential complicate the tax calculations of any future traditional to Roth IRA conversions because you must allocate basis across all traditional IRAs when converting some portion of your Traditional IRAs.

Regards, JAFO
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